Looking Ahead: 2021 Outlook for CRE Investors

July 06, 2020

Multifamily buildings typically take years from a land purchase to development to leasing, so taking the long view of the economy is essential for investors. We spoke with Kathy Bostjancic, chief U.S. financial economist for Oxford Economics, a provider of global forecasting and economic analysis for corporations, about her expectations for the U.S. economy and commercial real estate in the months ahead. 

Q. What does your economic forecast look like for the fourth quarter of 2020 and into 2021? 

Bostjancic: Unlike most recessions that start gradually, this is a sudden stop recession. Officially, the peak of economic activity was in February with the steep downturn starting in mid-March. We think GDP for the second quarter of this year will be down 41% on an annualized basis, but we're in a nascent recovery now. We're predicting a strong growth rebound with GDP up 28% in the third quarter and up 15% in the fourth quarter. 

The May employment report surprised everyone and is an indication that businesses are reopening and rehiring faster than expected. The equity market is back to where it was and has erased all its losses and portions of the credit market have comeback. 

If you tally up everything the federal government has done, including the Fed's quantitative easing policy of buying residential and commercial mortgages and keeping borrowing rates low, plus the stimulus funds from the fiscal side, they've added about five percentage points to the GDP. But now there's concern that if the state and local governments pull back their spending, that could offset some of the federal government stimulus. 

We'll see what happens with the next round of relief and whether it goes to state and local governments. 

Q. Is this a V-shaped recovery? 

Bostjancic: Even with the surprising rebound of the stock market, I think this recovery is more of a wide V-shape, like a tilted checkmark, rather than a straight up V. 

The financial markets are a leading economic indicator, so that's good news. That quick recovery happened in part because of the Fed's actions to soothe the markets. The stock market came back in a matter of months, but the overall economy will take until the fourth quarter of 2021 for us to fully recover and to get back to the level of 2019 GDP. 

The labor market is likely to lag a little behind the rest of the economy, so I think we'll see unemployment at 10% in the fourth quarter of 2020 and 6.5% in the first quarter of 2021. This is a short recession but it's also the deepest we've seen. 

The problem is that some segments of the economy won't come back right away, especially in businesses like travel or anything involved with social interactions. We're likely to see only about 60% of the employment we had come back by the end of this year. Some of these businesses may have already been bankrupted. We anticipate a surge in bankruptcies in small and medium-size businesses. 

Q. What will the capital markets look like for multifamily investors? 

Bostjancic: The Fed's purchase of commercial mortgage-backed securities had added some liquidity to the market. Now that things are reopening, we're starting to see construction and development begin again in places like New York, so it seems like they're able to finance this activity even now. 

Q. Do you anticipate a growth in home ownership because of low mortgage rates, or a delay in home ownership because of the economic disruption? Could this impact multifamily occupancy rates? 

Bostjancic: I've been surprised to see that home prices have been so resilient during this recession and we're seeing that market pick up again already with mortgage applications increasing. If people have a job, they feel like it's a great time to buy and they have the confidence to do it. 

This has been a mandated recession and we're already coming back. But there are still a lot of challenges for homebuyers, so I don't see this as a threat to multifamily investment. Unemployment is above 10% now and as we get further into the recovery some people will unfortunately find that their unemployment lasts longer than they think.